Every year in the January issue of GWI we do a survey of the growth of specialist water investment funds. We are expecting another big leap in assets under management in this year’s survey, which will be published later this month. What it won’t show is the growing interest in wet water investment. That seems to have been a big theme of 2020, not least because of the success of the Nasdaq Veles California Water Index. It rose by 118% over the year, and can now be traded through a synthetic futures contract.

But the growth of physical water ownership as an asset class for investors seems to have been met with growing alarm by progressives and environmentalists. Speaking in last month’s GWI, the UN Human Rights Rapporteur for Water Pedro Arrojo expressed concern about investors treating water “like gold, oil and other commodities”. A feature in the New York Times last Sunday focusing on the activities of New York-based fund manager Water Asset Management also highlighted the growing edginess about investors owning liquid assets. “They are going to make big bucks off the water, and who’s going to suffer? It’s the rural counties going up against big money,” one interviewee remarks.

I suspect that the opposition to investment in wet water is based on a fundamental misunderstanding about how Water Asset Management and its imitators make their money. The Dr Evil strategy of buying up California’s water supply and holding on to it until everyone is dying of thirst simply doesn’t work. There is no point in owning water that you don’t use.

Furthermore, the water rights market is a terrible place for outsiders, even if they are international criminal masterminds. There are a limited number of potential buyers and sellers in each water market. When they see some big city greenhorn turn up with a suitcase full of cash looking to buy water, they know how to relieve him of his burden, and then when heavy rains wash the investment strategy out, they are there to buy back their rights for a dime.

Water Asset Management’s strategy is much more savvy than that, and it is difficult not to see it as one of the most environmentally effective ways of investing in water. The company does not buy water to hold. It buys water to use and improve. Typically it looks for agricultural properties with good water rights and bad irrigation infrastructure. It can then invest in improving the water efficiency of the farming operation so that it has a surplus to sell on to other users. Where possible, it also looks to develop storage and transmission lines so that it can bank the excess water it receives in those truly wet years and sell it on to big city users when drought conditions return. If a severe drought means that the value of the water rises above the value of the crops, it can fallow the land and sell more water to cities. Its Winnemucca Farms potato operation in Nevada is an example of this strategy in action.

The fundamental problem in the western United States is that there are more water rights than water. From an environmental perspective, what is really needed is a buy-back of rights (like the A$9 billion scheme in Australia during the Millennium Drought) to ensure that nature gets its share in dry years. If that is not possible, then the arrival of water-oriented investors is the next best guarantee of sustainability. They can ensure that the ever-growing peaks and troughs of demand and supply can be managed through storage and transmission so that communities get the water they need, and they can force the pace in irrigation efficiency so that water works harder in the West.